Monday, April 7, 2014

Inflation is Hitting the Poor the Hardest

We tend to talk about inflation as a single number affecting the whole economy. But everyone experiences a slightly different rate of inflation for the simple reason that we all spend money on different things. The price of cigarettes matters primarily to smokers; the price of diapers affects mostly parents of young children; and the price of gas is a much bigger deal to someone with an 80-mile daily commute than to someone who only takes the car out for weekend excursions.

Overall inflation has been muted in recent years; consumer prices were up just 1.1 percent in February from a year earlier, far below their long-run average. But prices are rising a bit faster for both the poor and the wealthy, who have been hit harder by the ongoing increase in college tuitions. The result: from February 2012 to February 2014, the poorest fifth of households have experienced an annual rate of inflation that’s about two tenths of a percentage point higher than the population as a whole. The richest fifth have experienced inflation about a tenth of a point higher.

The difference in the rate of inflation between income groups is too small to matter much in the short-term, adding just a few dollars to the average family’s monthly bills. But the longer that low-income families continue to experience faster price increases, the bigger the effect will be, quickly adding up to hundreds of dollars a year in extra costs for the households least able to afford it.